Wednesday, July 17, 2013

In May 2013, the International Monetary Fund (IMF) released a short report on Iraq’s economy. It predicted continued growth in the
short to medium-term, but warned of structural problems as well. Iraq is
obviously famous for its oil industry, which still has huge potential to
expand. The issue with the country’s economy is that there is little else to
build upon. The government also plays a dominant role with all its
inefficiencies, and that has a negative effective upon the business
environment. That represents the dichotomy of Iraq. Oil presents a huge source
of wealth, but it could undermine the country as well.

In the aggregate, Iraq looks like it has a bright future.
Its economy grew 8.4% in 2012, and is expected to grow 9% this year. That
contributed to per capita Gross Domestic Product (GDP) going from $1,300 in
2004 to an estimated $6,708 by 2013. Inflation dropped as well from 6% in
late-2011 to 3.6% by the end of 2012, but is expected to go up this year to 5%.
Its foreign reserves went from $61 billion at the end of 2011 to $70 billion by
the end of 2012, while the reserves held at the Development Fund for Iraq
increased from $16.5 billion to $18 billion. Iraq failed to execute its
investment budget as it usually does, which contributed to those amounts. Overall,
Iraq will probably be one of the fastest growing economies in the next few
years. That is due to the predicted expansion of the oil industry. At the same
time, the IMF noted that there are governance issues that will have a
detrimental affect.

2010

2011

2012

2013

Real GDP growth

5.9%

8.6%

8.4%

9.0%

GDP

$135.5 bil

$180.6 bil

$212.5 bil

$233.3 bil

GDP per capita

$4.278

$5.529

$6,305

$6,708

The IMF pointed to budget execution and the exchange rate as
two problems that Baghdad had. The government suffered from not only poor
budget planning and execution in the last few years, but large off budget
spending as well. In 2013, that led to a large number of unfunded projects. The
IMF suggested that public expenditures be reduced as a result by cutting the
number of government jobs, and slashing energy subsidies and support for
state-owned enterprises. Recently there has been a run on the dinar. That
created a gap between the official exchange rate offered at state-run banks and
the rate offered at private money exchanges. The IMF believed that the dinar
needed to be stabilized. It suggested that the authorities support the Central
Bank of Iraq’s policies, which are aimed at achieving that goal. After 2005,
the Iraqi government suffered from a lack of trained staff to plan and execute
the budget.That led to almost the
entire budget going to paying government employees, and very little for
investment. The money that was set aside for that task in the capital budgets
was hardly spent as well. Officials eventually improved, but then in recent
years the budget has grown tremendously due to rising oil prices. This has led
to far more money being appropriated than the bureaucracy can handle, and the investment rate has gone right back down. The government appears to be more
interested in the amount of each budget, so that it can brag to the public
rather than whether those funds can actually be expended. As for the dinar, it is being manipulated by political parties, gangs, money exchanges, and foreign
countries right now. The acting Central Bank Governor Dr. Abdul Basit Turki
claims that he is reforming the anti-money laundering department, and trying to
place more regulations on the weekly money exchanges, but there doesn’t
appear to be any changes on the ground yet.

More importantly, the IMF noted the major structural
problems that could hinder Iraq in the long-term. First, Iraq is heavily dependent
upon oil. Its GDP and growth are directly related to how much petroleum it can
produce and export. That means that if oil prices were to drop, Iraq’s budget
and growth would be threatened as well. The government’s entire development plan
is based upon boosting oil output as quickly as possible. The money that it
raises is supposed to help diversify the economy, but that hasn’t happened.
Instead, this has swelled the government’s coffers, and increased the state’s
role. This is a classic example of the oil curse. Like many other bodies, the
IMF has suggested that the authorities speed up their reforms to support the
private sector, so non-oil jobs can be created. Finally, political and security
instability were noted. Iraq has seen a huge increase in investment in recent
years, but that was directly related to the end of the civil war when
foreigners finally felt comfortable about sending their money to the country.
Now security is worsening as the insurgency is growing. The rival political
parties have been in an on going test of wills against each other that has led
to deadlock in Baghdad as well. Together this has economic repercussions as
major legislation like the oil law has no chance of being passed in the current
political environment. The growing threat by militants could also scare away
investors. All together this poses a daunting set of barriers to Iraq’s future.
The government isn’t following its own suggestions, and warnings by various
international bodies about its oil dependency. Instead, it is making the
situation worse. The fact that Iraq’s ruling elite are at each other’s throats
doesn’t help either, because it means that no major decisions can be made or
the business environment improved. Finally, the worsening security situation
could reverse the flow of investment to Iraq.

At first look, Iraq looks to be a dynamic economy with high
economic growth rates and vast natural wealth. Under the surface, there are
major structural problems that severely limits realizing that potential. The
oil curse means that Iraq can bring in huge amounts of cash, while the majority
of the population faces high poverty and unemployment with the best hope being
getting a job with the government. Unless Iraq changes its regulations, and
begins to truly support its private sector this trend will not be broken. The
political and security situation may not allow that to happen by blocking
necessary legislation and decreasing investment. These were the warnings that
the IMF tried to raise. It’s yet to be seen whether Baghdad is listening.

IRAQ HISTORY TIMELINE

TWITTER

About Me

Musings On Iraq was started in 2008 to explain the political, economic, security and cultural situation in Iraq via original articles and interviews. If you wish to contact me personally my email is: motown67@aol.com